Brands selling on Amazon, where profit margins may already be slim, are looking for ways to minimize the impact of new tariffs on goods imported from China. In an effort to mitigate the impact on their bottom line, brands are looking to cut costs, raise prices or in some cases even move their supply chains.
While the tariff presents major challenges to established brands, it has also raised a barrier for new brands trying to break into Amazon. We know of at least one brand that had intended to launch on Amazon with the goal of just breaking even for the first few months until they’d generated the volume of reviews, sales velocity, and infrastructure to build the foundation of their Amazon account. The new tarrifs turned their break-even plan into a operating-at-a-loss plan. Ultimately, it wasn’t sustainable and they abandoned the project.
Another brand had 100% of their supply chain in China, and found the uncertainty around tariffs meant they couldn’t develop a well-enough informed business plan for their launch on Amazon. They elected to wait to launch until they could get more reliable numbers for their planning.
Details on the tariffs
This challenge to new and established brands alike, is a result of the so-called trade wars between China and the United States . In September, President Donald Trump announced that Chinese goods falling under certain categories will incur a 10% tariff until the end of the year. In 2019, the tariff will jump to 25%.
The tariffs impact a wide range of goods, some of which are traditionally popular items on Amazon. Some items affected by the tariff include: candies without cocoa, plastic gloves and rain jackets, leather handbags, fur and artificial fur clothing, upholstery, denim, man-made textiles, fabrics, ceramics, glass and glassware, the list goes on.
Brands manufacturing entirely or partly in China will need to take a hard look at their operations to find ways to minimize the impact on their profit margins.
What brands can do to minimize impact
Brands can apply any of the following strategies to minimize the impact of tariffs on their bottom line:
Strategy 1: Manufacture Elsewhere
Pros: Avoids tariffs to minimize impact on consumer pricing.
Cons: Loss of infrastructure. Time consuming and complex to execute. May not save enough in the long run.
This is much easier said than done. Many brands have well-established manufacturing chains that operate almost entirely inside China. This has been the case for decades, and as a result, the country as built up an infrastructure of well-integrated manufacturing facilities, packaging companies, labeling services, shipping and logistics support and other essentials. They also have well-maintained roads and reliable transportation.
The New York Times reports that some brands are moving their supply chains to Cambodia, Vietnam, Bangladesh or Ethiopia. However, moving a supply chain takes time, and ultimately, what brands save by moving to these countries with less robust infrastructures may not completely offset the cost of the tariffs. Workers will need to be trained, roads improved, facilities built - it all takes time and comes at a cost.
Finally, moving your supply chain involves some risk. Will the products be of the same quality? Are all the links in the chain reliable? Of course, wages in China have risen in recent years, meaning that a move to another country with less expensive labor might actually be overdue for some brands, but labor costs are only a part of the equation.
Strategy 2: Raise Prices
Pros: Brands can offset the cost of tariffs without the headache of moving supply chains.
Cons: Consumers may switch to a less-expensive option.
Brands can maintain their profit margin by simply raising prices. In the short term, this is the easiest strategy, since brands won’t have to worry about moving supply chains, training new workers, or inspecting the quality of an untested manufacturer.
However, consumers may not take a price hike in stride. An increase in cost big enough to cover the tariff may be more than they are willing to accept. Some will decide to shop with brands that aren’t importing from China and thus have not needed to raise their prices. Others may see a narrowing gap between your traditionally inexpensive brand and a luxury brand and decide to upgrade instead of shopping with you.
Strategy 3: Find Efficiencies Elsewhere to Maintain Margins
Pros: Doesn’t involve customers or disrupt supply chains.
Cons: Brands that already run lean may have no efficiencies left to find.
Brands should always be looking for ways to improve operational efficiency. A regular reexamination of process, roles and strategies is smart business with or without new tariffs. Many brands know this, and already have plans in place to trim the fat. However, a 25% tariff is a lot of fat to trim. Brands may find that they simply can’t cut costs that drastically without compromising quality or customer service.
Ultimately, some brands will have no choice but to lose profits, at least in the short term. Over the long term, a combination of two or all three of the strategies above can help brands maximize their earnings in a sustainable way.
Looking forward, how brands can minimize future impacts
This isn’t the first time that legislation has impacted brands on Amazon. Laws and regulations change month to month and year to year. Brands should assume that change in inevitable, and be as prepared for it as possible. Ways to get ahead of future changes include:
Set aside money - Establishing a rainy day fund as early as possible can help brands weather unexpected challenges like new tariffs.
Stay informed - Keep an eye on the news so you can know about tariffs, regulations, policy changes, and other factors that might impact your business.
Plan ahead - Create contingency plans for how your brand will respond to potential challenges to prevent a panicked scramble when the changes hit.
How Bobsled can help
Bobsled's Account Audit service is designed to help brands develop their Amazon strategy by providing comprehensive account performance analysis for existing sellers, including Amazon fee review and vendor negotiation recommendations, to ensure you’re running as efficient an operation as possible.
For brands looking to launch on Amazon, our Launch Service includes a Pre-Launch Report which breaks down the opportunity for your products on Amazon by analyzing competitor performance, category insights, price recommendations, sales projections, and all of the necessary Amazon insights you need to determine your brand’s opportunity on Amazon and whether the challenges these tariffs present will undermine your chance to win big on Amazon.